The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, March 11, 2011

Global economy spinning round and round, round and round...

You would be forgiven for being a little confused, right now. Just when you thought you'd put the GFC and then the European sovereign debt crisis behind you, and that global economic growth was re-accelerating through Q4 last year (with strong, coordinated surges in global PMIs), we have a spate of what economists like to call "exogenous events". Others refer to them as "black swans". In Australia, we might think of them as "white swans": eg, the devastating floods, Cyclone Yasi, the NZ earthquake, the fall of Tunisia, then Egypt, and now Libya. And, of course, we have the "day of rage" in the world's largest oil exporter, Saudi, looming overnight. A toxic cocktail of burgeoning global inflation pressures with uncertain growth outcomes.

Equity markets have been hammered, with the local bourse still 30% below its November 2007 peak, as we predicted would be the case years ago (see first chart). People like to say that the Aussie equities market is 50% off its lows. But that's if you picked the exact trough, which was near impossible, ex ante. For those invested in equities prior to the GFC, which includes almost all investors, they are still down 30%. And even if you invested for the first time in, say, late 2009, you are losing money 18 months later in 2011. In fact, Australian shares have not risen since about February 2005 (see chart). Combine that with 18-20% pa volatility, and they have been a truly dud investment. You would be much better taking a (AAA-rated) government-guaranteed term deposit compounding at 6-7% pa with literally near-zero risk. The same sad story is true of US equities (orange line), which are mapped against Aussie equities (white line) in the second chart. It took circa 7-9 years for the All Ordinaries Index to consistently breach its peak after the 1987 crash, and it would not surprise if the same were true once again.

Australia's unemployment rate looks to have hit a floor of sorts at 5.0%, and the Chinese trade data for February appeared at first glance shocking (there are, however, good explanations for this result given the Lunar year interruption and the extraordinary outcomes in January). The real spanner in the works right now is the price of oil, with Brent jumping some 35% since November last year. This has the potential to put substantial downward pressure on global growth. Think 1970s-style stagflation.

And the central banks will have an awful policy challenge on their hands: do they crush rising inflationary expectations via restrictive rate settings in a high unemployment, sub-trend growth environment in order to secure our long-term welfare? Or do they lose grip of their hard-won independence and politicise their price stability mandates by keeping rates low in spite of high and volatile inflation (with the attendant benefit of reducing the real cost of huge government debts)?

The key for the global economy right now is how quickly the Middle Eastern saga can right itself and thereby return oil prices to pre-crisis levels. The major developed economies with big, theoretical output gaps have a very strong interest in rapidly remedying this situation. I would expect, therefore, surprisingly decisive action by the US, UK, EU and NATO to try to get a durable political outcome in Libya. And I would be staggered if any big Western nation seriously supports democratic movements in Saudi, with the nontrivial risk of kick-starting an Iranian-style theocracy in the event that the ruling monarchy is removed.

While this is not investment advice per se, as a participant you ideally want to be market neutral, and completely free of beta or market bias, such that you can go directionally long or short with equal ease. Of course, this is not easy to achieve in most traditional asset-classes.

I tell you, the world is getting more complex, more uncertain, and more difficult to navigate. I agreed with Glenn Stevens' remarks in London two nights ago: "I haven’t yet found a counterpart with whom I would like to swap problems at this point." It is true that for the time being, Australia remains the lucky country. Even if commodity prices do fall, interest rates will be slashed and the exchange rate will materially depreciate, offering a powerful cushion to households, manufacturers, exporters, and all import-competing industries. It is the flip-side of having nearly 90% of all borrowers with variable-rate debt. So you probably want to get long interest rate sensitive sectors in the event that the terms of trade boom disappears.

I love this column , which echoes my views on the subject (see here ). Excerpt below... IF the value of your total assets fell by 6 per c...

Hey there...

I first started blogging on ideas relating to economics, finance, investments and housing following an invitation from Business Spectator. Please note that I may have an economic interest in any of the items discussed here. You should also be aware that these are my own personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments. Call 1800 YBR YBR to find a financial planner near you.

About Me

While this is a personal blog, professionally Chris is a director and strategic advisor to a number of funds management and financial services companies. In 2009 The Australian newspaper selected Chris as one of Australia’s top 10 “Emerging Leaders” in its economics category. In 2007 Chris was selected by The Bulletin magazine as one of Australia's "10 Smartest CEOs" and by BRW Magazine as one of "Australia's Top 10 Innovators". He previously worked for Goldman Sachs and the RBA. In 2008-09, the Australian Government invested $20 billion in a radical policy proposal developed by Chris to provide liquidity to Australia’s securitisation market. In February 2009, Chris was invited by the Rockefeller and MacArthur Foundations to present innovative policy solutions at the private Transforming America’s Housing Policy summit for Obama Administration officials. Chris served as a Director of The Menzies Research Centre from 2003-07. He has published widely on matters relating to financial economics, and is a regular TV and media commentator. He is a Research Affiliate with the Centre for Ideas and The Economy at Melbourne Uni.